UPDATED: Lehman on brink of bankruptcy

One loose end from the fruitless weekend negotiations was the fate of an estimated $85 billion in bad loans Lehman has on its books. The company sought to separate those out and sell them, but found no buyers, and the government was unwilling to make them more salable by providing a guarantee.

Some analysts fear that if the loan portfolios are sold at fire sale prices in bankruptcy proceedings, that will lead to further steep writedowns of similar loans on the books of nearly every other U.S. bank and financial institution, possibly triggering another round of deep losses and bank failures.

But many other Wall Street analysts have concluded that a Lehman bankruptcy can be absorbed by the financial system without great damage.

“Six months after Bear, regulators should have ensured that a smallish investment bank could go under without systemic damage,” said Richard Beales, analyst at Breakingviews.com. “If Hank Paulson and company feels the need to step in, it suggests
that years of deregulation have locked in a government backstop for Wall Street’s risk-taking.”

“Lehman has a negative net worth,” said Peter Morici, business professor at the University of Maryland. “Most other banks need all the cash they have to cover their own bad securities, and any money they put into a crippled holding company would likely just be lost.”

“It is time to toss in the towel on Lehman, unwind the counterparty trades and march it through Chapter 7,” he said.